Governments around the world are rolling out a host of policies to deal with the crisis created by the spread of COVID-19. The economic shock of this crisis is going to be enormous, with an enormous human cost. The pain will fall disproportionately on certain people and certain areas.
Some policies can be drawn from the usual macroeconomic toolbox. Central banks have suitably eased monetary conditions. Unemployment insurance and other forms of income support are essential to help laid-off workers and struggling businesses. The case for such support seems particularly clear and uncontroversial in this case because there is no moral hazard – the closed local restaurant and its employees are of course not responsible for this health crisis.
In several important respects, however, the current situation is different from past macroeconomic crises. More importantly, there is a direct conflict between some traditional recession-fighting policies and solving the health crisis, which we believe must take priority. After all, normal macroeconomic policy would never encourage workers and customers to stay home, even though that is exactly what we might need now. Additionally, businesses and households must learn to operate in a totally different environment given the need for social distancing. Finally, while recoveries from financial crises are notoriously long, this crisis offers the possibility of an unusually rapid recovery once the virus threat has passed. Our aim is to offer a framework and some useful guiding principles to think about these new elements of this crisis caused by the pandemic.
We organize our discussion around three pillars of the economic policy response. First, following the advice of medical experts, we must do everything to spread the number of infections over time, or “flatten the curve”. Second, policies must facilitate production and decision-making in a temporarily socially distant world. Third, we must prepare to make post-virus recovery as fast as possible. While these three aspects of the policy response will unfold in sequence, policymakers should begin to act on all three now.
This article, written by the directors and board of directors of Chicago Booth’s Initiative on Global Markets, continues on igmchicago.org. Click here to read it in full.